Shares, euro fall as fresh Fed stimulus hopes fade

Published: 4 April 2012 4:50 PM

LONDON, April 4 — Stocks and the euro fell today after the US Federal Reserve dimmed hopes for fresh asset-buying, further underlining its divergence with an embattled Europe that faces recession and remains firmly in crisis-fighting mode.

Overnight minutes from the Fed’s March meet showed less support for more quantitative easing (QE), or bond-buying, in the face of improved economic data, which buoyed the dollar and hit stocks in both the United States and Asia.

With Europe still battling its debt crisis and struggling with economic growth, the focus later will be on the European Central Bank’s latest rate-setting meeting, with rates expected to remain on hold at 1 per cent.

Weakness in Asia extended into early European trade, with the FTSEurofirst 300 down 0 .5 per cent and world stocks down 0.8 per cent at 0809 GMT.

Emerging markets stocks, meanwhile, were 1 per cent lower.

“Additional QE and/or extension of the current ‘operation twist’ programme have been a central focus for financial markets in recent months, but the overnight release of the latest (Fed) meeting minutes appeared to douse these expectations,” Cameron Peacock, market analyst at IG Index, said in a note.

“The result was predictable — an initial sharp sell-off in equities, a spike higher in the (dollar) and a corresponding slump in commodities and risk currencies. European markets were closed by the time the minutes were released and will have some losses to catch up with when they open.”

Early moves in the euro were also weak as a result of the Fed action, with the single currency down 0 .4 per cent against the dollar and the yen.

The greenback climbed 0.1 per cent against a basket of currencies.

“The market is moving on reduced probability of further QE in the near term and that’s helping to support the US dollar across the board,” said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi.

“The euro is likely to adjust lower on the back of the euro zone economy underperforming which will require the ECB to run a loose policy stance. There could potentially be a slightly more dovish stance from the ECB today and that contrast with the Fed will provide euro/dollar with some downward momentum.”

ECB moves eyed

The softening in US central bank support for fresh stimulus is unlikely to be mirrored by the ECB, which should maintain a supportive stance in the face of inflation concerns.

Bund futures sold off in early deals before paring losses to trade down 0.1 per cent, tracking overnight moves in US Treasuries in response to the Fed minutes, and attention will now shift to the ECB meeting and two fresh sales of peripheral euro zone debt.

Spain, in the bond-market spotlight as concerns around its finances and economic outlook grow, is set to see its borrowing costs jump at auctions of up to €3.5 billion (RM14.2 billion) in paper, while Portugal also comes to market to sell 18-month T-bills.

“It’s going to be a struggle, especially for Spain,” said a trader. “I don’t see any compelling reason to buy Spain at the moment.”

Spanish and Italian benchmark government debt yields rose slightly ahead of the auctions.

Yesterday, Spain, which recently announced a fresh budget, as it slides back into recession, said its debt level was on course to reach a 22-year high.

Spain’s large service sector continued to contract in March, albeit at a slower pace, data today showed, propelling the euro zone laggard towards a technical recession, after its economy contracted in the last quarter of 2011.

Data from Italy also showed contraction and French data showed a stagnation in the euro zone’s second-biggest economy as it gears up for presidential elections — broad weakness that suggests the euro zone as a whole is in recession.

Among commodities, Brent crude oil, the European benchmark, was down at around US$124 a barrel on the Fed comments, while gold was also slightly lower, at around US$1,642.66 an ounce. — Reuters

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